Jacob Austin (00:00:17) - Hi everyone, and welcome to episode 39 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode, number 39 is going to be about final account procedures. I'm your host, Jacob Austin. I firstly want to thank you for tuning in. If you're new to the show, please do subscribe for more user friendly advice on all things subcontracting. Now, let me just briefly start by telling you about a friend of mine who owns a ground working company, and we were sat in my office on a busy site doing his booking in. And this is a guy that would openly tell me I don't do anything with those contracts. I don't know nothing about them. I just leave that to you boys. And as we were sat together working out how much he'd earned and how much I needed to pay him for the last two weeks, he started telling me about a time where he'd come unstuck because he didn't know what the final account process was, and he's been merrily going along operating a JCT subcontract or not really more, letting somebody else operate it for him, and he gets close to the end of the job.
Jacob Austin (00:01:26) - He's finished everything that he needed to do on the site, and then the contractor asks him if what it sent in this month was his final account, and not fully appreciating the process, he just says yes. And that triggered the start of the contractor's final account procedure. And if you read your subcontract, the contractor has got an entire eight months from the receipt of your final account. And all of the information that goes along with that has eight months to issue a final account. So two weeks later, my friend is there wondering where his payment is, and the contractors sat there quite happily saying it's not due. And the problems didn't stop there. Sadly, he'd not been submitting cumulative valuations properly and at some point in the job, some of the early variations it completed had dropped off his application. And so he'd in effect told the contractor that he submitted his final account, but it didn't include all of the money that he thought he was entitled to. Of course, I asked him then why he didn't negotiate it back in, but then he told me later that he hadn't realised until after he'd been to a final account meeting.
Jacob Austin (00:02:36) - And of course, the contractor is sat there thinking happy days. This is well within budget, so he signs him up and it's all done with now. Obviously that was disappointing for him and with hindsight he would do different things. So in today's episode, I want to give you a few gifts of knowledge to help you to avoid that situation yourselves. So I'm going to talk about what a final account needs to include for various different kinds of contracts. I'm going to look at how I would typically set out a final account, and then I'm going to look at the timescales referring back to the most common subcontract that good old JCT 2016 design and build. Now its common custom and practice for there to be a final account issued on all manner of subcontracts. And actually under the NEC suite of subcontracts, there isn't actually a final account process. And if you're lucky enough to be working on an NEC project, I think this way of working is ideal. And the proviso that this works on is that each time there is a change, there's a compensation event as it's referred to under that subcontract.
Jacob Austin (00:03:42) - The costs associated with the change are added to the activity schedule. So whether that's something gets omitted, something gets added, some extra time is expended. The costs associated with all of that is taken as an item. And it's added to the bottom of the activity schedule, which is the build up of your subcontract sum in the way that you're going to draw it down. So the beauty of that is that there isn't a protracted final account process. You simply adding changes as they go along. And when it gets to the end of the job, you've completed them all. You apply for them all and for options A and B, it really is that simple. Where NEC can get a bit more challenging is when there's actual cost involved, because you then need to substantiate everything that you've spent so that the final position can be worked out. Now contrasting that to the JCT position, the process is a lot more complicated, and that is because each of the different places where you might be entitled to more money are broken apart within the contract.
Jacob Austin (00:04:42) - So whereas the NEC contract has a simple long list of compensation events, the JCT suite of contracts have almost all the same items within there, but they're split apart. So you've got changes which are a completely separate concept to loss and expense. And then you have the added complications of provisional sums, items with provisional quantities and prime cost sums. Now, I did a detailed episode on provisional sums, which is number 27, and within that I covered the difference between all of those provisional items, including the provisional sum. What an undefined and a defined provisional sums, prime cost sums and provisional quantities. But as far as the final account is concerned, all of those things get omitted. Of course, by the time you finished the job, all of the unknown items should be known, and therefore all of the unknown sums of money should have been firmed up and the provisional sum emitted and a variation added back to cover the piece of work. And in essence, what your final account should be including is the initial contract sum less the amount of those provisional sums, adding back in the valuation of any variations, the value of any acceleration quotations.
Jacob Austin (00:05:57) - And he lost an expense that isn't already included in a variation, and then any fluctuations. And this is only included if fluctuations are triggered by a subcontract. There is then one final statement on the JCT subcontract which says. Any other amount which under this subcontract may or is required to be taken into account in the calculation of the final subcontract sum. Now, I find this a bit of a peculiar statement, because when you read the full subcontract to my mind, everything that you would expect to be able to charge has a mechanism for you to charge it. So there are change provisions, there are loss and expense provisions. There are provisions for changes in conditions. So I can only think that this is something that you would have pre-agreed, which may have sat, say below the line within the subcontract. And if a certain event happened, you would get paid a sum of money and that might be excluded from your subcontract sum. But there might be a statement to say if you finish five weeks early, then you get X amount as a completion bonus or some kind of other condition.
Jacob Austin (00:07:02) - Or perhaps there's an adjustment for main contractor's discount that was given on the proviso of achieving a particular payment period, and then if that payment period isn't achieved, this would be the place that you charged to recover it. And I would also say the same with interest payments that are due for late payments. Beyond those couple of items, I can't think of a lot that would be listed under that particular heading. So now let's talk about how you would set out your final account statement. So you don't want to make this an overly complicated document. So I'll be trying to keep this to one page with probably four columns to it. So I always like to have an ID column so that when you're talking about things in a meeting, you can say it's item number three, item number eight, and whatever. So I would start with that. Then moving across to the right, set out your description then set out the amounts. Then finally I would include a comments column. And I would use that column to reference either a contractor's instruction which is entitled you to that extra money.
Jacob Austin (00:08:03) - And I would also state whether items have been agreed or not, and the date that they were agreed on. And what you want to try and do here is do away with any ambiguity. So that when it comes to having any kind of final account meeting, you've got a straightforward document to follow, and you're only rarely discussing any items which haven't got a pre-agreed sum, an agreement date against them, then working logically down from top to bottom, you want to start with the subcontract sum, and first item is always to omit any provisional items provisional sums. Then you want to start adding in your variations. And I would do this in chronological order so that it follows logically from which that were first instructed through to the most recent ones. And alongside these, as I said, if you can demonstrate that they were agreed and they were agreed on a particular date or a particular meeting, then do so. State in the comments. What you can also do as well is state which ones of them have been paid in full.
Jacob Austin (00:09:01) - Now a good contractor will state which ones have been agreed when they're issuing your payment notice, so there's no debate about whether they agree to paying it or not. But some contractors, QTS will pay things at certain times and then roll back on them at a later date. And that can be the source of a lot of argument and frustration. And they will sometimes state that, okay, that was an interim valuation. But when it gets to the final accounts, they've done a proper assessment of it. And on the one hand, that can be acceptable because the contractor is able to make mistakes and then correct those mistakes at a later date. But where you can start having some debate about that is when the so-called mistakes have lasted for periods of months. And I've seen some adjudicators decide that variation should be paid where they've been paid before, and the contractor has only decided to roll back on them at final account stage. And that is because they're saying by paying them for a period of time, it's creating an implied promise that you're going to get that money.
Jacob Austin (00:10:01) - Now, that's not to say that if somebody makes a mistake one month and then they correct that mistake the following month, that the same scenario would be created. So if you're going to have a conversation about whether an implied promise to pay has been made, you want to also have at the back of your mind a thought about whether it's reasonable that an error could have been made. Perhaps some information has come to light at a later date, which requires correction of an earlier variation, and that information wasn't around at the time of some of the interim applications. So of course, there are circumstances where things can be unpaid, but for good and reasonable reasons. But you need to use your judgement and challenge anything that isn't. Next, you want to list out your loss and expense items if there are any, of course. And alongside these in the comments column, I would be stating why you're entitled to charge these items and again, if they've been agreed or not, and what date that agreement was reached upon.
Jacob Austin (00:10:59) - Now the standard subcontract would be telling you to list out any fluctuations entitlements. And I've never actually triggered a fluctuations entitlement clause with any of the subcontracts that I've put together. So I would expect. This is a fairly rare entitlement for you, but if fluctuations have been triggered, then you're going to need to list out how much you're entitled to at the date ranges, that you're entitled to them in each amount. And what I mean by that is that the indices that fluctuations are charged against are periodically revised, and you need to calculate against each period the amount that you are entitled to, as in the amount of work that you've completed. And then multiply that by the amount that your index prescribes. And then finally it's at any other amounts item. And again list your items out and state how you are entitled to them in the comments. And what you should end up with is a one page document that lists from start to finish from the subcontract sum chronologically through any changes, loss and expense, and other items.
Jacob Austin (00:12:03) - All of the things that you're entitled to charge. So now some best practices a good way to approach your final account is to include a rolling final account within your regular interim applications, because what you want to happen is for there not to be any surprises when it comes to getting around the table to make that final assessment, make that final agreement of how much your subcontract is worth. You might see that as extra administration to do, but in essence, it is quite straightforward because what you can do is take your subcontract sum. And then on Excel you can link all of your variations to your variations tab so that you're just pulling through the description and the final amount. And of course you can do the same with any loss and expense items and your provisional sums. You can also periodically submit a draft final account. And it makes sense if you're doing this towards the back end of the job. But it starts to give people a picture of where things are heading and to trigger those important conversations so that come the end of the job, you're not arguing about absolutely everything in the account because amounts of them can be pre-agreed.
Jacob Austin (00:13:15) - You want to formally submit your final account within the right timescale, and we'll mention timescale in a minute. And where it's a good idea, I would suggest that you do some joint valuation, particularly if there's a remeasurement of any particular items. It might be that the subcontract sum is remeasured as a whole, so it may well be worth jointly remembering the remeasurement items so that at least they're not to a source of debate. And you can agree them as you go. Make sure that any loss and expense items have been properly established. As in, if you're entitled to them, you need to submit your notices at the right period of time and provide enough supporting information for the loss and expense to be properly calculated and ascertained, and be prepared that you get asked for additional information to support your variation claims. It's reasonable for you to be asked for invoices, time sheets, pro-rata build ups and records of the timescales and the nature of work that is carried out. Now. Once you've got the assessment from the contractor, that's the opportune point to start arranging a meeting and try and ensure that the appropriate people are there from both sides, ones that can speak to the nature of any of the changes that haven't been agreed, and ones that can make decisions as to how much you can get paid on behalf of the contractor.
Jacob Austin (00:14:36) - And of course, if you're going to have a final account meeting, it goes without saying that you ought to be prepared for that meeting. And what I mean by that is for any items that you know are on. Agreed. And you're expecting to go to a meeting and get agreed, the best thing you can do is to rehearse your arguments on it, and be prepared to present any detailed assessments. You have to demonstrate that you are entitled to the amount that you're claiming. There might be certain parts that you have to negotiate, but those should be minimised by either working through them collaboratively with the contractor, or by having that robust assessment that hopefully can't be argued with too much to demonstrate how much you need to be paid. So finally then, on the subject of timescales, I'm referring as usual to our trusty JCT design and build support contract where against calculation of the final subcontract sum, it says not later than two months after practical completion of the subcontract works, the subcontractor shall send to the contractor all documents necessary for calculating the final subcontract sum.
Jacob Austin (00:15:42) - So it's in your interest to do this as quickly as possible. But two months is the backstop by which you're expected to have provided your final account. Now, if you don't submit a final account and whatever supporting information you need to provide, the contractor can do its own assessment and prepare a subcontract final account some to you, the subcontractor. So you ought to be seeing this as your final bite at the cherry and your final chance to get any entitlements. On the page. And as I say, this is two months after practical completion and the statement is not later than. So there's nothing stopping you from issuing it as soon as you've got practical completion. Next, the contractor has eight months after receipt of your documents to prepare a statement calculating the final subcontract sum. And it's worth noting that that is the maximum period it's not later than. So if there's not a lot to agree, then it's worth pressing your contractor to get that action sooner, because clearly that's two thirds of a year. And for cashflow sake, it's definitely within your interest to push them to settle up sooner.
Jacob Austin (00:16:52) - So the mechanism says that you present your calculation. Then the contractor responds to that with their calculation. Now, if you don't agree with the contractor's calculation, you have a month to air your disagreement in writing, giving your reasons for for disputing any items you don't agree with. And essentially, if you do nothing at this point, the contractor's final account assessment is deemed accepted. The actual words say the final subcontract sum shall be deemed to have taken into account all adjustments required by these conditions. So that might seem unfair and it is heavily one sided. The contractor has got eight months to review your account and send you back their statement, and then you've got a month to dispute it. But if you look at it a slightly different way, you might be presenting items within your final statement that the contractor needs to go out and remeasure and revalue themselves, and that timescale affords them the time to do that, knowing that they've also probably got 20 other subcontracts to do the same activities with. And also they've presumably reviewed and assessed the majority of your changes, or in fact, all of them.
Jacob Austin (00:18:01) - And the ones that you have any dispute with are presumably down to a minimum. So then it's how long do you need to get back to the contractor on those handful of items? A month, probably seems like a reasonable period if you view it that way round. And then in terms of payment, the final payment shall be two months after the latest of the following three items. So the issue of the contractor's final account statement, the retention release date, or if the retention release date is delayed because there are defects and those defects have to be made good, then the final payment isn't due until those defects are made good. And note this is the first retention release and not that final retention release at the end of the defects period. So that goes to say, if you've got any defects hanging around at the end of practical completion and they've been issued to you on a snagging list, if you don't action them, the contractor doesn't have to pay you the final account sum until of course, you've sorted them.
Jacob Austin (00:19:02) - Now hopefully goes without saying that the final payment should be the final account, some less the amounts previously paid. Okay, and that wraps up pretty much all I want to say on final accounts. For the time being, let me know if you've got any comments on that or any further questions. I'm happy to discuss in the comment section on LinkedIn, Instagram or otherwise, where you can find me at question and I hope that helps. My mission is to help the million SME contractors working out there in our industry. So if you've taken some value away from today's episode, I'd love it if you'd share the show and pass that value on to someone else who would benefit from hearing it. And of course, subscribe yourself if you haven't already. Thanks for tuning in. If you like what you've heard and you want to learn more, please do find us at QS.Zone. That's the letters Q and S, dot, zone Z-O-N-E, where you can subscribe to our training and support system for like minded subcontractors.
Jacob Austin (00:20:03) - In there you'll find templates how to videos. Interviews are more. It's less than the price of a cup of coffee per day, and you can cancel any time. We're also on all your favourite socials @QS.Zone. Thanks again! I've been Jacob Austin and you've been awesome.
